Lateral thinking should be given some latitude

By Ross Gittins

23 February 2008 — 12:00am

If Kevin Rudd wants someone at his 2020 experts' summit with fresh ideas about how economics can make the world a better place, he could do worse than invite Melbourne's Nicholas Gruen. Dr Gruen, from a family of distinguished economists, has a consulting firm called Lateral Economics - and he's the closest the dismal scientists come to being a lateral thinker.

There's no shortage of economists willing to lecture politicians about the "unfinished micro-economic reform agenda" - and they have their place - but some of Dr Gruen's ideas are so different they don't sound like they're any business of an economist.

"There are diminishing returns to the economic reform path we are now on," he says, "characterised as it is by a well-worn formula of deregulation in the markets for finance, goods and labour, corporatisation, competition, user pays, outsourcing and privatisation."

All his ideas are based on conventional economic principles, but principles applied in unconventional ways.

Take, for instance, his views on "wikinomic reform". Just as there's a global interest in fighting new public bads - terrorism and rapid-spreading pandemics - so the internet has generated new and important classes of public goods. Open source software, Wikipedia and the ABC website are all global public goods, available to all comers at zero marginal cost. And public goods are core business of governments, he says.

Advertisement

The ABC has moved to the global forefront in the new medium of podcasting. But why not go one better and make the entire ABC archive available for download from the net? That would be a glowing global advertisement for Australian talent and curiosity.

Then let's buy up some strategic intellectual property and make it freely available - some copyrights of classic Australian culture, some patents of low value that might nevertheless be barriers to other people's research.

And why not experiment with some public seed funding of strategic open source software. "How many schools and universities could use Linux, Firefox and Open Office rather than the usual Microsoft stuff?" he asks.

Next, take Dr Gruen's views on employment. Despite its treatment within economics as a "disutility" endured to obtain income, work is a central activity through which we seek much of our life's achievement, meaning and value.

"We should consider employee morale and satisfaction as a major output of the labour market," he says. "Classical economists joined the fight against slavery by showing how misery and oppression depressed productivity.

"In a similar spirit, reformers today should be excited by strong links between employee morale, work satisfaction and productivity. Improved information about employee experience inside workplaces would intensify competition between employers to provide satisfying jobs, [thus] improving productivity and labour market efficiency."

What reforms could you make? Try this. Most workers care about workplace safety, but typically lack information about it when applying for a job. Yet the workers' compensation premiums paid by firms provide a good proxy for their past occupational health and safety performance.

We should publish them, Dr Gruen says, and require that existing and prospective employees are provided with information on how they compare with economy-wide and industry-wide average performance.

When it comes to federalism, there's a lot of pressure - particularly from business - for the states to adopt a uniform approach to school curriculum, workers' compensation, occupational health and safety laws and so forth. But this is hard to achieve and sacrifices the benefits of diversity and competition between the states. What's more, the great majority of businesses operate just within one state.

Dr Gruen's solution? The feds could introduce national regulatory systems to operate alongside state ones for the benefit of national businesses.

Turning to our court system, he says the rule of law requires that citizens have access to the independent adjudication of civil disputes. In practice, however, only big companies and the wealthy - plus those poor enough to attract legal aid - have access to justice. "Clearly, we have the rule of law in form only if parties can only access dispute resolution at the risk of financial ruin," he says.

Dr Gruen's solution? Require that the resources expended in trying a dispute must be commensurate with the magnitude of that dispute, as measured by the amount of money ultimately at issue.

This would require presiding judges and magistrates to operate more actively in managing cases.

Next is taxation. One of the central aims of good tax policy is to minimise the extent to which it changes people's economic behaviour and so imposes costs on the economy.

This makes it fortunate that some taxes change people's behaviour in desirable ways. It follows that taxing goods is bad, but taxing bads is good.

Huh? Most economic activity we don't want to discourage, but some we do. Such as? Activity that pollutes or causes traffic congestion.

Dr Gruen reminds us we could reduce the distorting effect of taxation if we were to tax bad things such as pollution and congestion and use the revenue raised to reduce taxes on activities we don't want to discourage.

Pollution taxes are, of course, closely related to tradeable permit schemes (provided the permits are sold rather than given away). So the greenhouse gas emissions trading scheme we're set to introduce in 2010 will be a major example of taxing bads.

But why tax congestion?

When you're in a traffic jam you not only incur the time costs of waiting and the physical and environmental costs of running your car. You also impose costs on others - you're a "polluter" in the sense that, if you weren't there, those in front and those behind you could be going faster.

The Bureau of Transport and Communication Economics has estimated that in 1995 congestion in our capital cities cost about $13 billion a year - with Sydneysiders bearing nearly half the total. Taxing drivers who want to travel at peak times - as is done in Singapore and London - reduces congestion because it encourages some people to travel at other times to avoid the tax. Those who insist on travelling during the peak pay to cover the congestion cost they've imposed on others, thereby reducing the need for governments to tax other activities quite so heavily.

Aside from being an unpopular idea, congestion taxing hasn't been a terribly practical idea. But the advent of electronic tags will soon change that.

Long before congestion taxes become commonplace, however, Dr Gruen's fertile mind will be working on other, more novel ideas.